Though the Fed has been in a slow rate-hiking pace since December 2015 — the December 2017 increase was the fifth in the current cycle — its benchmark funds rate remains targeted at just 1.25 percent to 1.5 percent.
Rosenberg said the latest run-up in stocks may be due to a market that believes the new Fed, with Powell at the helm, won’t be in a hurry to raise rates. A hawkish central bank has been near the top of most Wall Street strategists’ lists of what could go wrong in 2018.
“The elephant in the living room remains the central banks,” Rosenberg wrote. “The prevailing view is that balance sheet tapering will be mild and that Jerome Powell will prove to be a dove. This may well be the most important psychological driver for the market — that a new and inexperienced Fed will not take the punchbowl away in the coming year.”
Rosenberg, however, worries about valuations promoted by a Fed policy that is misguided particularly when it comes to inflation. The Fed’s targets 2 percent inflation growth as a sign of healthy and sustainable economic growth, but has failed to reach that level despite a decade of historically accommodative policy.
While inflation is not showing up in the traditional indicators like personal consumption expenditures and the Consumer Price Index, Rosenberg said it is elsewhere — “art, equities, corporate credit, real estate, cryptocurrencies, commodities, precious metals. Let me know if I have left anything out.”
Recent comments from investor Jeremy Grantham warning of a market “melt-up” or final push of cash into stocks, followed by a meltdown, caught Rosenberg’s eye.
“So Jeremy Grantham could well be onto something in his recent blow-off thesis,” he wrote. “But he is also intimating that we are heading into the final bubble phase and those don’t end well.”
Correction: The Fed has hiked rates five times during this cycle. A previous version contained an incorrect total.